2 Maximising value for taxpayers |
8. The Authority was not in a strong position
to ensure risk transfer to the private sector when it ran the
competition for the contract to manage the Sellafield site in
2008 as it did not have a coherent plan for the site or an adequate
understanding of the scope, schedule or cost of the work required.
The Authority told us that it would have been theoretically possible
to build some sort of risk transfer into the contract. However,
the Authority told us that for the terms to be acceptable, the
premium demanded by bidders from the Authority would have been
astronomical. The Authority therefore proposed a cost reimbursement
contract and accepted that none of the final four bidders in its
competition for Sellafield would take on any financial risk.
9. Many of Sellafield Limited's contracts with
its subcontractors are undertaken on a cost reimbursement basis
or involve only limited transfer of financial risk, owing to the
continuing uncertainty over the true costs of the work on the
site. Only one of the 14 major projects at Sellafield involves
a fixed cost contract.
This means taxpayers, rather than Sellafield Limited or its subcontractors,
bear the full cost of the work on the site regardless of whether
there are delays and cost overruns.
10. The Authority told us that it now had a more
complete and more coherent plan. It also told us, nevertheless,
that it remained a long way away from having the certainty on
costs necessary to be able to transfer risk to the site management
company. Instead it has encouraged Sellafield Limited to pass
some of the risk down to the supply chain for specific projects
or programmes. The Authority told us that this had been done where
there was good benchmarking and reliable data on which to base
an estimate of a target or fixed cost and that Sellafield Limited
was looking at whether there is scope for further risk transfer
through the competition for the silos direct encapsulation plant.
11. Nuclear Management Partners claimed to have
achieved efficiency savings worth £700 million since 2008.
By the end of the first contract term in 2014, it expected to
have achieved just enough savings£1.15 billionto
meet the minimum performance standard required to enable the contract
to be renewed, that is 80% of the savings it offered in its original
bid for the contract to run Sellafield.
Some of these savings came from Sellafield's reduction of the
proportion of its spending on support and overhead costs, as staff
had been redeployed from support and overhead activities into
frontline activities. Following our review of decommissioning
in 2008, the Authority committed to reducing support and overhead
costs across its estate by 25% over four years. The Authority
told us that Sellafield was ahead of schedule against this target.
12. The level of efficiency savings achieved
determines the fees earned by Nuclear Management Partners and
will be a factor in the Authority's forthcoming decision on contract
renewal. In 2011-12, the Authority paid £54 million in fees
to Sellafield Limited, which it can pay on as dividends to Nuclear
Management Partners. The contract with Sellafield Limited provides
for fees which are performance related so that Sellafield Limited
can earn more money if it works quicker and for lower cost. In
the case of the evaporator D project, whose lifetime costs have
increased by almost £250 million since 2009, the Authority
has paid Sellafield Limited small amounts of fees but reported
that overall Sellafield has so far lost fees of £17 million
and could lose a further £25 million.
13. It is vitalif the taxpayer is to get
a good deal from this contractthat past and future 'savings'
figures are properly tested.
The Authority's central audit function and its 'site-facing team'
based at Sellafield examined and verified these savings figures.
But the National Audit Office have looked in detail at Government
savings figures in the past and established that claimed savings
have often been overstated. 
14. In addition to fees, the Authority also pays
Sellafield Limited significant sums for executive and expert staff
on secondment from Nuclear Management Partners. In 2011-12 it
paid £17 million for experts seconded from Nuclear Management
Partners' constituent companies, known as 'reachback', at an average
of some £270,000 per head, and £11 million for senior
executive staff, at an average of £690,000 per head, to bring
in international expertise. The cost of Sellafield Limited's highest
paid Director was just over £1.2 million. While these totals
include some other costs, such as re-location costs for expatriate
employees, they represent huge salaries, not least considering
the economy in the North West.
The Authority does not operate a cap on salaries at Sellafield,
unlike in the United States, where the Department of Energy has
set a cap of $750,000 on executive pay. The Authority told us
that Sellafield's rates were necessary in a competitive market
to ensure that it could secure the skills it needed. However,
it admitted that it had struggled for some time to get an adequate
description of why 'reachback' was being used on occasions. There
is therefore a risk that Sellafield Limited and Nuclear Management
Partners are making additional money at the taxpayers' expense.
15. Nuclear Management Partners' constituent
companies can also make profits through contracts from Sellafield
Limited. Contracts between Sellafield Limited and Nuclear Management
Partners' constituent companies AMEC, AREVA and URS accounted
for 6% of total procurement spending at Sellafield in 2011-12,
worth £54.4 million. This total could rise in future, particularly
as Sellafield Limited lets major framework contracts. The Authority
required Sellafield Limited to make sure it did not give contracts
preferentially to its parent company's constituent businesses
and the Authority examined such contracts in particular detail.
The Authority told us that this arrangement was standard practice
in the decommissioning industry and that it had sufficient controls
in place, but recognised that it could be perceived differently.
16. Sellafield Limited spends almost £1.6
billion of public money each year.
This major investment by the taxpayer has the potential to achieve
considerable sustainable economic benefits for the region and
for the UK. Almost
£1 billion is spent annually on procurement by Sellafield
Limited and it is important that this spending supports local
regional innovation and provides work for local companies and
employment for local people. Sellafield Limited has made arrangements
to give local visibility of the work available on the site and
has worked with its large suppliers to encourage them to engage
with the local supply chain.
17. Sellafield Limited, Nuclear Management Partners,
the Department for Business, Innovation and Skills and the Department
of Energy and Climate Change are all involved in initiatives to
support the development of the nuclear supply chain. Both Sellafield
and Nuclear Management Partners have funded the Britain's Energy
Coast organisation, which is the main economic development agency
in this area, and have provided funding worth £7 million
between them. Britain's Energy Coast is due to publish a blueprint
for local economic development
and the Department of Energy and Climate Change has developed
a strategy for building a UK supply chain for the whole nuclear
there was no clear ambition or targets for maximising the impact
of taxpayers' money spent at Sellafield in terms of job creation,
business support or skills development in the area 
19 Q 62 Back
Qq 58, 60-61 Back
Q 62 Back
Q 62 Back
Q 145-146, 152 Back
Qq 34-39, 103 Back
Qq 150-152 Back
Qq 68, 70, 79 Back
Qq 68, 74-81, 128 Back
Qq 88-93 Back
C&AG's Report, para 5 Back
Qq 106, 109, 115 Back
Qq 106-107 Back
Qq 107, 113 Back
Q 114 Back